The budget should prioritize growth while staying on the path to fiscal consolidation
Omicron may be less severe, but still caused some economic disruption, especially in the service sector, due to restrictions in various states. Several economists recently revised their forecasts for GDP growth for the year ending March 2022 to 8.5% to 9%, about 0.5% to 1.0% lower than previous projections.
Therefore, the focus area of the Union budget 2022-2023 will be to stimulate economic growth and ensure that all sectors are ready for a post-pandemic world, while being prepared for future waves. This will require a lot of funding, which is in limited supply. When the pandemic hit in early 2020, GDP growth was already slowing. In 2020-21, the budget deficit was allowed to fall to 9.3% of GDP to finance stimulus measures. In the 2021-2022 budget, the government targeted a budget deficit of 6.8%, well below that of the previous year, but still well above the fiscal slippage trajectory of reducing it to less than 4, 5% by 2025-2026.
With private investment yet to pick up significantly, the government will have to do the heavy lifting again, but Finance Minister Nirmala Sitharaman is also expected to take some additional steps towards fiscal consolidation. A comforting factor is that revenue collection has been strong. Between April and November, revenue collection was Rs13.6 lakh crore, 76% of the budget estimate (compared to 40% in the same period last year).
Net tax revenue stood at Rs11.4 lakh crore (73.5%, down from 42% last year). TPS collections were also strong at Rs10.7 lakh crore (85% of target). But that will be offset by higher-than-expected payouts on food and fertilizer subsidies, health care, and rural jobs programs. Moreover, the Center also risks missing its divestment target.
The divestment has generated only Rs9,329 crore, so far, against the target of Rs1.75 lakh crore. The government had ambitious plans to take the LIC public, divest its stake in Bharat Petroleum, and privatize two public sector banks and a state-run general insurance company, among others. The sale of BPCL will be postponed until next year. The privatization of two public banks and a general insurer also appears to be delayed.
But the government hopes to complete the public issuance of LIC shares by the end of March. There is intense activity, from bureaucratic corridors in Delhi to investment banking offices in Mumbai, to complete what will be by far the biggest IPO in the country. By some estimates, the LIC IPO, which is expected to fetch a valuation of Rs1 lakh crore or more, will be the third largest insurance IPO in the world.
However, the insurer has not yet filed its draft prospectus with market regulator SEBI. “I’m not sure the IPO will happen by March,” said Madan Sabnavis, chief economist, Bank of Baroda. “Customs clearance normally takes more than two months. So even if they file the paperwork by the end of January…it’s fine [have to] to be one of the fastest jobs SEBI has done, while being doubly cautious given the size and scope of the problem.
Furthermore, as pointed out by Mr. Govinda Rao, Chief Economic Advisor, Brickwork Ratings, even if the government were to proceed with the divestiture of LIC in the current fiscal year, there would still be a shortfall of almost Rs 70,000 crore of the budgeted target. Rao, a member of the Fourteenth Finance Committee, added that according to the estimate of nominal GDP (17.6%; first advance estimates), the budget deficit stands at 6.5%.
However, analysts differ on the government’s ability to meet its budget deficit target. Sabnavis and Arun Singh, Chief Economist, Dun & Bradstreet, estimated the budget deficit could be around 7-7.1%. “The government has made additional requests for additional expenditure of Rs3 lakh crore,” Sabnavis said. “So if this is spent and we miss Rs50,000 crore in divestment, even if tax revenue increases by Rs1 lakh crore, we might exceed the target.” The government should set an even lower target for the next fiscal year. year. Expectations range from 6 to 6.5%.
Over the past few years, the Narendra Modi government has focused on reviving the economy with huge capital expenditures on infrastructure. This should also represent a large part of the budgeted investments this time around. The defense will also take an important part. At the same time, the government will have to try to revive consumption. Rural consumption has slowed due to income uncertainty, rising global commodity prices and supply chain disruptions. Singh said more money needs to be in the hands of the masses through programs such as NREGA and the PM-Kisan program.
But government borrowing is already high. Over the next financial year, gross borrowing is expected to be around Rs12 lakh crore (net borrowing: Rs8-9 lakh crore). “The budget faces acute political trade-offs between sustaining a nascent recovery and shrinking fiscal space with challenging debt dynamics,” said Madhavi Arora, chief economist, Emkay Global Financial Services.
So, in order to get the budget deficit under control, where can the government look to reduce? Singh said he might have to consider non-significant expenses, like some of the non-meritorious property grants. Better resource allocation and possible fiscal financing through aggressive asset sales or infrastructure monetization would also be key, the economists said.
Against this backdrop, the government is unable to significantly increase capital spending, Sabnavis said. “Free food may have to be given; health care spending will need to be increased,” he said. “Fertilizer subsidies can increase. There will also be some other commitments. Therefore, there is not enough room for a large increase in capital expenditure. Maybe it can go from Rs5.5 lakh crore to Rs6 lakh crore, but nothing much higher than that.